Buying and selling your home can be a complicated process. Sometimes, the timing just does not line up. You may find your dream home before you are ready to put your current home on the market. We can help take that pressure away by arranging a bridging loan for qualified clients, whereby the bank will help you finance the property you want to buy while you wait for your current property to sell.
What is a bridging loan?
A bridging loan is a temporary loan for 6–12 months that allows you to settle on the purchase of your new home while you wait for your old home to sell.
How do I know if a bridging loan is right for me?
A bridging loan is typically used where:
- You are buying a more expensive property than your current home, i.e. you are upgrading or upsizing
- You have purchased or about to purchase your new home, but have not yet listed it for sale yet – this may be due to timing or because you need to prepare it for sale e.g. renovations
- You meet other criteria such as having sufficient equity in your current home or cash set aside to afford the interest on the bridging loan
What are the costs of the bridging loan and how is it paid?
A bridging loan is a service provided by the bank, and as such, incurs interest. This interest is paid for in one of two ways:
- As an interest only expense paid monthly during the bridging period
- As capitalised interest
What does it mean to have interest capitalised?
Capitalised interest is where the bank adds their interest to the bridging loan, at the end of the bridging period, just before the loan is paid out.
This usually has the convenience of not having to maintain monthly payments on the bridging loan, and therefore preserves your savings as, usually, most spare money has been contributed towards the deposit on your new property.
However, it is usually more expensive as a higher rate is charged.
What is the alternative to a bridging loan?
The main alternative to a bridging loan is to sell and settle on your current home prior to or simultaneously with the settlement of your new home.
Banks view this approach as less risky. It is also less costly as you avoid bridging loan interest.
However, it is not always viable, where you find a property you like quickly and have not listed your current property for sale.
What are the main requirements for a bridging loan?
For a bridging loan to work you will need to demonstrate the following:
- You have sufficient equity in your current property to close out the bridging loan and pay for any capitalised interest after sale
- You can afford the interest during the bridging period either from savings set aside or having enough equity buffer to pay for capitalised interest
- You can afford the “end debt” that will remain once the bridging loan is closed
Please also note that, when calculating if there is sufficient equity, the bank will also discount the value of your property slightly to account for any real estate agent selling fees and also to protect the bank in case the property is sold for lower than expected.
What is the “Peak Debt”?
The peak debt refers to all the debt you will take on during the bridging period. It is typically quite high and consists of the bridging loan required plus the end debt remaining. During the bridging period interest must be maintained on both the bridging loan and the end debt.
What is the “end debt” or “Residual Debt”?
The end debt, or the “residual debt”, is the loan remaining after the bridging loan has been closed. You must be able to demonstrate that you can service the end debt for the bank to approve a bridging loan.
How do I know if there is enough equity in my current home?
The bank will order an official valuation report on your current home to make sure it has sufficient equity to pay out the bridging loan upon sale.
Again, despite this valuation report the bank will still discount the value of your property slightly when calculating your bridging loan to account for any real estate agent fees and to protect the bank in case the property is sold for lower than expected.
Which banks offer bridging loans?
Not all banks offer bridging loans. Which bank we recommend depends on who your home is mortgaged to now, the value of your current home, and your current cash position, amongst other factors.
If you are considering a bridging loan, please contact us so we can provide you with a tailored assessment and recommendation.
How long does a bridging loan last for?
A bridging loan usually lasts for a 6 to 12 month period. You may elect the term when making your application, and we typically recommend a longer term to give you enough time to sell your current home. It is in your best interest to close out a bridging loan as soon as possible to minimise the interest costs to you.